Lead Opinion
OPINION
In 1986, petitioner-appellee Aeroquip-Vickers, Inc. (formerly known as Trinova Corporation, and operating as the Libbey-
In 1993, the Commissioner of Internal Revenue (CIR) asserted a deficiency against LOF for LOF’s failure to include ITC recapture in income under former 26 U.S.C. § 47(a)(1) on its 1986 consolidated tax return. Trinova petitioned the United States Tax Court for a redetermination of the deficiency. The Tax Court held that neither the transfer of the property from LOF to LOF Glass nor the change in ownership of LOF Glass was a disposition of Section 38 property under 26 U.S.C. § 47, and that Trinova thus had no recapture obligations. CIR appealed. For the reasons set forth below, we reverse the decision of the Tax Court.
I.
The facts are not disputed. Pursuant to Tax Court Rule 91(a), the parties submitted a Stipulation of Facts, which the Tax Court summarized as follows:
Petitioner, an accrual basis taxpayer ... changed its name to Trinova from the Libbey-Owens-Ford Company (LOF) on July 31, 1986. Petitioner timely filed a consolidated Federal income tax return with certain of its subsidiaries for the years at issue with the Internal Revenue Service Center, Cincinnati, Ohio, or the Internal Revenue Service office in Toledo, Ohio. Petitioner was engaged in the fluid power and plastics businesses and the manufacture of glass. The- glass business was referred to as “LOF Glass Division.”
One of LOF’s largest shareholders was Pilkington Brothers (Pilkington), an English company, which owned 29 percent of petitioner’s common ■ stock through its wholly owned U.S. subsidiary, Pilkington Holdings, Inc. (Pilking-ton Holdings). Two of petitioner’s fourteen directors were associated with Pilkington. In late 1985, Pilkington approached LOF and began negotiations concerning the possibility of acquiring the glass business.
Earlier that year, on July 25, 1985, the board of directors of LOF approved the transfer of the glass business to a wholly owned subsidiary for valid business reasons. On February 19, 1986, LOF Glass, Inc. was incorporated as a wholly-owned subsidiary of LOF. On March 6, 1986, a “Transfer and Assumption Agreement,” amended on April 25, 1986, transferred to LOF Glass, Inc., all assets associated with the LOF Glass Division, including inventories and receivables, effective retroactively to February 19, 1986. These assets also included section 38 assets upon which LOF had previously claimed ITCs. Petitioner took no formal action contemplating the liquidation of LOF Glass, Inc., in the event that the acquisition by Pilking-ton did not take place.
*176 On March 7, 1986, LOF, Pilkington, and Pilkington Holdings entered into an agreement, amended on April 28, 1996, whereby LOF would transfer all of its shares of LOF Glass, Inc., to Pilkington Holdings in exchange for all of the shares of petitioner held by Pilkington Holdings. On April 28, 1996, Pilkington Holdings exchanged 4,064,550 shares of LOF for the shares of LOF Glass, Inc. LOF Glass, Inc., continued to operate the glass business as a subsidiary of Pilkington Holdings and used the section 38 assets in its trade or business.
The parties have stipulated that petitioner recognized no gain or loss upon the transaction whereby its glass business was transferred to LOF Glass, Inc., pursuant to the provisions of section 351 or sections 354, 355, and 368(a)(1)(D) (except as required by such sections or section 357(c)), and that pursuant to section 355 neither petitioner nor Pilking-ton Holdings recognized any gain or loss upon the exchange of LOF Glass, Inc., shares for the LOF shares.
Before February 19, 1986, income, deductions, and credits with respect to the LOF Glass Division were included in petitioner’s return. From February 19, 1986, through April 28, 1986, deductions and credits with respect to LOF Glass, Inc. (the subsidiary), were included as part of petitioner’s consolidated return. After April 28, 1986, LOF Glass, Inc., was no longer part of petitioner, petitioner’s affiliated group, or petitioner’s consolidated Federal income tax return.
On its 1986 consolidated return, petitioner did not include any amount of ITC recapture with respect to the LOF Glass, Inc., section 38 assets. Respondent determined that a $5,718,749 ITC recapture arose from the April 1986 transaction. Petitioner does not dispute the amount of the ITC recapture....
On November 26, 1993, CIR issued a notice of deficiency to Trinova, stating that Trinova had understated its tax liabilities on the consolidated income tax returns that it had filed with its subsidiaries between 1985 and 1988. On February 18, 1994, Trinova filed a petition with the Tax Court contesting the deficiencies, including CIR’s recapture of ITCs under 26 U.S.C. § 46. On February 27, 1997, the Tax Court found in favor- of Trinova on the issue of the recapture of the ITCs. On October 1, 2001, the Tax Court entered a decision disposing of all claims of all parties. CIR timely filed a notice of appeal.
II.
The Tax Court’s application of law to the fully stipulated record is reviewed de novo. See Friedman v. Comm’r,
Under former 26 U.S.C. §§ 38 and 46, a taxpayer who acquired certain machinery and equipment for use in its trade or business (Section 38 property) was allowed a credit against its income tax liability in an amount equal to a percentage of his investment (the ITC). However, under former 26 U.S.C. § 47, the ITC was limited to property that the taxpayer used in its trade or business for most of the property’s useful life. If the taxpayer disposed of Section 38 property before the end of the useful life, then the taxpayer was required to recapture the ITC and increase its tax liability. See 26 U.S.C. § 47(a)(1). The stated purpose of this provision was “[t]o guard against a quick turnover of assets by those seeking multiple credit.” S.Rep. No. 1881, 87th Cong., 2d Sess. 11 (1962), U.S. Code Cong. & Admin. News at 3297, 3320.
Determining that Trinova was not liable for ITC recapture, the Tax Court emphasized that “the transactions herein took place in the consolidated return context.”
In support of its decision, the Tax Court relied upon CRR § 1.1502-3(0(3), which provides the following examples:
Example (1). P, S, and T file a consolidated return for calendar year 1967. In such year S places in service section 38 property having an estimated useful life of more than 8 years. In 1968, P, S, and T file a consolidated return and in such year S sells such property to T. Such sale will not cause section 47(a)(1) to apply.
Example (3). Assume the same facts as in example (1), except that P, S, and T continue to file consolidated returns through 1971 and in such year T disposes of the property to individual A. Section 47(a)(1) will apply to the group ...
Example (5). Assume the same facts as in example (1), except that in 1969, P sells all the stock of T to a third party. Such sale will not cause section 47(a)(1) to apply.*178 When there is no intention at the time of transfer to keep the property within the consolidated group, the transaction should be viewed as a whole and not as separate individual transactions.... Because the transfer of the section 38 property from P to S is a step in the planned transfer of the property outside the group, the exception in section 1.1502 — 3(f)(2)(i) of the regulations does not apply to this transaction. Therefore, the transfer from P to S is a disposition under section 47(a)(1) of the Code.
CIR argues that the Tax Court erred by failing to give appropriate deference to Revenue Ruling 82-20,
Rejecting CIR’s position, the Tax Court concluded that “Example 5 and not Rev. Rui. 82-20 ... provides the key to decision herein.” Trinova Corp. v. Comm’r,
[w]ith all due respect, we disagree with both the result and the reasoning of the Courts of Appeals.... We think that the fact that the transfer of the assets and the transfer of the stock occurred in the same, rather than different, taxable years does not provide a meaningful basis for distinguishing Rev. Rui. 82-20 ... from Example 5 of the regulations .... We think the Courts of Appeals for the Second and Ninth Circuits accorded the ruling undue weight and that revenue rulings play a lesser role than the language of the opinions of those Courts of Appeals seems to indicate.
Trinova Corp.,
In Salomon, Engelhard Minerals and Chemicals Corporation (EMC) (later known as Salomon) developed a plan to separate its marketing arm and its industrial divisions into two independent companies.
The Second Circuit concluded that Revenue Ruling 82-20 was not “unreasonable, nor inconsistent with prevailing law,” and thus was “entitled to great deference.” Id. at 841. The Second Circuit explained that since a direct transfer of Section 38 property was a disposition under 26 U.S.C. § 47(a)(1), “the more circuitous transfer by way of another consolidated group member should be as well.” Id. at 842.
In substance, if not in form, the direct and the circuitous transaction are the same. Each achieves a rapid transfer of section 38 property outside the group. To distinguish between them would deny economic reality. Moreover, such a holding would allow the common parent*179 of a consolidated group, such as EMC, to move section 38 property outside the group without paying recapture taxes simply by first transferring the property to a member subsidiary and then distributing the subsidiary’s stock to the third-party. Revenue Ruling 82-20’s requirement of recapture under these circumstances is not unreasonable.
The rapidity with which these components follow one another suggest that they are, in substance, parts of one overall transaction intended to dispose of the section 38 assets outside of the consolidated group. Revenue Ruling 82-20 further solidifies this inference by positing that there is “no intention at the time of transfer to keep the property within the consolidated group.” These factual circumstances, timing and intent, differ from those presented in CRR Example 5. They lead to the conclusion that the two components are steps in a larger transaction which, when viewed as a whole, constitutes a § 47(a)(1) “disposition.”
Id. at 842 (citations omitted).
The reasoning and conclusion of the Second Circuit was subsequently adopted by the Ninth Circuit in Walt Disney. In that case, Retlaw, a predecessor of Walt Disney Inc. (Disney), developed a plan to separate its “Disney assets” (including the commercial rights to the name “Walt Disney” and two attractions at Disneyland) from its “non-Disney assets” (two television stations, a cattle ranch, and several agricultural properties), and then allow Walt Disney Productions (Productions) to acquire Retlaw (which would only retain its Disney assets). Walt Disney,
Retlaw and Flower Street then filed a consolidated federal income tax return. Id. In the consolidated return, however, Retlaw did not recapture the ITCs it previously had taken on Section 38 property included among the non-Disney assets transferred to Flower Street. Id. As a result, the IRS assessed a deficiency, which Disney contested. Id. Reversing the decision of the Tax Court, the Ninth Circuit applied Revenue Ruling 82-20 and determined that Disney was required to recapture the ITC it had previously taken with respect to Section 38 property transferred by Retlaw to Flower Street. Id. at 739. The Ninth Circuit explained that
Revenue Ruling 82-20 is not unreasonable because “[i]n substance, if not in form, the direct and the circuitous transaction are the same” and “to distinguish between them would deny economic reality” and would allow the common parent of a consolidated group to circumvent easily the recapture requirement. Moreover, Revenue Ruling 82-20 and Example 5 of the Consolidated Return Regulations are not inconsistent because they address different situations: the latter covers situations where, due to a “meaningful time delay” between the asset transfer and the spin-off, there is*180 “little reason to believe that the trans-feror corporation intends to use the transaction as a means of moving section 38 property out of the group while avoiding recapture taxes”; the former involves facts under which the transfer- or’s initial intent to move section 38 property out of the consolidated group is undisputed.
Id. (quoting Salomon,
As the Tax Court observed, both the Second Circuit and the Ninth Circuit afforded “great deference” to Revenue Ruling 82-20. This court previously has held that “[although a revenue ruling ‘is not entitled to the deference accorded a statute or a Treasury Regulation,’ a revenue ruling is entitled to some deference unless ‘it conflicts with the statute it supposedly interprets or with that statute’s legislative history or if it is otherwise unreasonable.’ ” CenTra, Inc. v. United States,
However, recent Supreme Court decisions limiting the Chevron doctrine have called our earlier cases into question. In Christensen v. Harris County,
When promulgating revenue rulings, the IRS does not invoke its authority to make rules with the force of law. Specifically, the IRS does not claim for revenue rulings “the force and effect of Treasury Department regulations.” Rev. Proc. 89-14, 1989-
Aeroquip-Vickers argues that “neither the ITC regime nor the consolidated return regulations contain any ambiguity justifying Rev. Rui. 82-20.” Aeroquip-Vickers further contends that Revenue Ruling 82-20 is inconsistent with § 1.1502 3(f) because the express terms of § 1.1502-3(f) do not explicitly refer to “intent” or “timing” requirements. As previously discussed, substantially similar challenges to Revenue Ruling 82-20 were considered and rejected by both the Second and Ninth Circuits in Salomon and Walt Disney. “Uniformity among the circuits is especially important in tax cases to ensure equal and certain administration of the tax system. We would therefore hesitate to reject the view of another circuit.” Nickell v. Comm’r,
Moreover, the approach favored by CIR and adopted by the Second and Ninth
Aeroquip-Vickers also argues that the “step transaction doctrine” is inapplicable in this case, since CIR has stipulated that valid business reasons existed for the intermediate steps taken by LOF. The step-transaction doctrine was not directly addressed in either Salomon or Disney. However, as Judge Swift of the Tax Court observed in his dissenting opinion, both of those decisions “rel[ied] heavily on ‘economic reality’ and the ‘substance-over-form’ doctrines, which are simply broader labels for, and which encompass, the step transaction doctrine.” Trinova Corp. v. Commissioner,
This court has applied the “end result” test in order to determine whether the steps of a transaction should be treated separately or as a single unit. Brown,
A recitation of the stipulated facts supports the conclusion that LOF entered the transaction with the intent to move Section 38 property out of the consolidated group. In late 1985 representatives of Pilkington approached LOF concerning the possibility of acquiring its glass business. Negotia
Aeroquip-Vickers argues that, unlike in Disney and Salomon, in this case CIR “stipulated to the propriety not only of each step but also of the entire reorganization and split-off.” Aeroquip-Vickers contends that since “the whole transaction and each step along the way had economic substance,” no “tax avoidance motive” can be attributed to LOF.
Admittedly, this case does not involve a situation where “[t]he whole undertaking ... was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else.” Gregory v. Helvering,
Here, although the individual steps of the transaction had a legitimate business reason, the transaction must be treated as a single unit and judged by its end result. “To ratify a step transaction that exalts form over substance merely because the taxpayer can either (1) articulate some business purpose allegedly motivating the indirect nature of the transaction or (2) point to an economic effect resulting from the series of steps, would frequently defeat the purpose of the substance over form principle.” True v. United States,
III.
For the foregoing reasons, we reverse the decision of the Tax Court.
Notes
. "When Congress has ‘explicitly left a gap for an agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation,’ Chevron,
. A recent Tax Court Memorandum decision also grants a revenue ruling Skidmore deference. See Tedoken v. Comm’r,
. As Judge Swift of the Tax Court noted below in dissent, "[t]he weight to be given a revenue ruling is not the issue in this case. Rather, the issue is the validity of the underlying rationale of Rev. Rul. 82-20.” (JA 198.) Put differently, the amount of deference to be accorded to Revenue Ruling 82-20 ultimately turns upon the validity of its reasoning.
Dissenting Opinion
dissenting.
The majority overstates the level of deference revenue, rulings receive. The Supreme Court’s decision in United States v. Mead,
This opinion is noteworthy because it involves a three-judge panel of the Court of Appeals reversing (by a two-to-one vote) a “fully reviewed” (effectively “en banc”) eleven-to-six decision by the United States Tax Court, which handles only complex tax disputes and consists of seventeen eminent jurists who specialize exclusively in tax law. An overwhelming majority of the Tax Court found Commissioner’s Revenue Ruling unpersuasive, although two of three judges of this Court find the Revenue Ruling compelling — in part because Commissioner drafted the regulation. Commissioner is also a party to this dispute; in fact, the IRS seeks to collect millions of dollars. The Tax Court’s experts have no stake in the outcome.
To simplify this controversy: two different kinds of tax guidelines conflict. On its face, a treasury regulation, § 1.1502-3(f), seems to support Taxpayer. An interpretation of that regulation, Rev. Rul. 82-20, seems to support Commissioner. The question is whether the regulation itself or the Revenue Ruling governs the disputed transaction.
I.
In footnote three, the majority explains that “the amount of deference to be accorded to Rev. Rul. 82-20 ultimately turns upon the validity of its reasoning.” I completely agree. Mysteriously, however, the majority also states that the Tax Court erred “[b]y noting only that revenue rulings ‘are not entitled to the deference accorded a statute or a Treasury regulation,’ without explicitly acknowledging that some deference to revenue rulings is proper.” To the extent the majority implies that a revenue ruling could ever receive more deference than its persuasive value warrants, the majority is incorrect.
As the majority properly notes, the Supreme Court’s decision in United States v. Mead,
Mead explained that “a very good indicator of delegation meriting Chevron treatment is express congressional authorizations to engage in the process of rule-making or adjudication that produces regulations or rulings for which deference is claimed.”
The majority agrees that Chevron does not apply to revenue rulings because such rulings are issued without the force of law.
In Skidmore v. Swift & Co.,
When the majority claims the Tax Court erred by failing to acknowledge that “some deference to revenue rulings is proper” (emphasis added), the majority overstates Skidmore “deference.” Skidmore “deference” does not always involve “deferring” because the level of respect afforded the agency pronouncement depends on its “power to persuade.” Skidmore,
The majority cites a string of four cases in support of its statement that even after Mead “some deference to revenue rulings is proper.” Yet none of these cases push Skidmore “deference” to the level that the majority would have in the present case. The first case cited, Omohundro,
The second case cited, Del Commercial Props., Inc. v. Comm’r,
The third case cited by the majority, U.S. Freightways Corp. v. Comm’r,
Although we acknowledge that even after United States v. Mead Corp.,533 U.S. 218 ,121 S.Ct 2164 ,150 L.Ed.2d 292 (2001), we owe some deference to the Commissioner’s interpretation of his own regulations, we conclude here that the lack of any sound basis behind the Commissioner’s interpretation, coupled with a lack of consistency on the Commissioner’s own part, compels us to rule in favor of Freightways.
This statement highlights again the importance of Mead. While U.S. Freightways professes to accord some “deference,” it is not at all clear that the term is being used to signify anything substantially beyond than the “power to persuade,” under Skid-more. After all, as stated in the quoted passage above, U.S. Freightways rejected the Commissioner’s ruling, which severely calls into question the amount of true deference that was actually given by the Seventh Circuit.
The last case cited by the majority is Am. Express Co.,
While the language contained in Omohundro, U.S. Freightways, and American Express does indicate that even after Mead some “deference” is due to revenue rulings, it is not at all clear that this deference is anything more than Skidmore “deference,” which simply mandates that the reviewing court must consider agency interpretations, examining them for their “power to persuade.”
The following sections explain why the government’s reasoning is invalid.
II.
Unlike the majority, I see no reason to rely on two equally antiquated decisions from other circuits that deal with ostensibly similar tax controversies.
In both Disney and Salomon, the taxpayers sought rulings from the IRS as to
Even without this distinction, neither Disney nor Salomon should influence this Court. Both Disney and Salomon explicitly stated that IRS revenue rulings deserve “great deference.” Disney,
III.
The next step is to consider whether the Commissioner has offered a persuasive position.
A.
The consolidated return provisions in the tax code allow multiple corporations (including a parent and subsidiaries) to file a single consolidated tax return. I.R.C. §§ 1501, 1504(a)(1). The majority notes this, but fails to recognize how the single taxpayer theory implicates the present controversy.
To file a consolidated return, each subsidiary must be linked, directly or indirectly, to the common parent by an ownership chain of both 80% of the voting power of the subsidiary and 80% of the value of the subsidiary’s stock. I.R.C. § 1504(a)(2). Once a group of corporations elects to file a consolidated return, the corporations must remain in the group unless they
B.
Congress delegated authority to the Treasury Department to promulgate regulations governing the distribution of tax credits among the members of a consolidated group. Accordingly, the Secretary of the Treasury instituted § 1.1502-8, which covers the handling of “consolidated tax credits,” including the disposition of Section 38 property. See Treas. Reg. § 1.1502 — 8(f). Under section 1.1502-3(f)(2)(i):
a transfer of Section 38 property from one member of the group to another member of such group during a consolidated return year shall not be treated as a disposition or cessation within the meaning of section 47(a)(1). If such Section 38 property is disposed of, or otherwise ceases to be Section 38 property or becomes public utility property with respect to the transferee, before the close of the estimated useful life which was taken into account in computing qualified investment, then section 47(a)(1) or (2) shall apply to the transferee with respect to such property (determined by taking into account the period of use, qualified investment, other dispositions, etc., of the transferor). Any increase in tax due to the application of section 47(a)(1) or (2) shall be added to the tax liability of such transferee (or the tax liability of a group, if the transferee joins in the filing of a consolidated return).
(emphasis added). Thus, the regulation tests the transferee to determine whether it must recapture ITCs and whether the transferee may report the recapture on its separate return (if it has left the consolidated group) or the consolidated group return (if the transferee remains a member of the group).
C.
Once § 1.1502-3(f)(2)(i) imposes transferee liability for ITC recapture on consolidated group members, § 1.1502 — 3(f)(3) provides five illustrations of how § 1.1502-3(f)(2)(i) will apply:
Example (1). P, S, and T file a consolidated return for calendar year 1967. In such year S places in service Section 38*190 property having an estimated useful life of more than 8 years. In 1968, P, S, and T file a consolidated return and in such year S sells such property to T. Such sale will not cause section 47(a)(1) to apply.
Example (2). Assume the same facts as in example (1), except that P, S, and T filed separate returns for 1967. The sale from S to T will not cause section 47(a)(1) to apply.
Example (3). Assume the same facts as in example (1), except that P, S, and T continue to file consolidated returns through 1971 and in such year T disposes of the property to individual A. Section 47(a)(1) will apply to the group and any increase in tax shall be added to the tax liability of the group. For the purposes of determining the actual period of use by T, such period shall include S’s period of use.
Example (4). Assume the same facts as in example (3), except that T files a separate return in 1971. Again, the actual periods of use by S and T -will be combined in applying section 47. If the disposition results in an increase in tax under section 47(a)(1), such additional tax shall be added to the separate tax liability of T.
Example (5). Assume the same facts as in example (1), except that in 1969, P sells all the stock of T to a third party. Such sale will not cause section 47(a)(1) to apply.
When closely scrutinized, these examples vindicate Taxpayer’s position.
In example one, P, S, and T are members of a consolidated group at all times. There is no § 47 disposition of the Section 38 property when S obtains it and sells it to T, because T has simply assumed S’s role.
In example two, S acquires the property from P before the corporations become members of a consolidated group. S then transfers the property to T after the corporations form a consolidated group. P still did not engage in a § 47 transfer because the entire transaction occurred within a consolidated group.
In example three, the corporations acquire and transfer the Section 38 property while belonging to a consolidated group, but T then transfers the Section 38 property to some unrelated party. This triggers a § 47 ITC recapture for which the consolidated group is responsible.
In example four, when T transfers the Section 38 property to an unrelated third party, P, S, and T are no longer members of a consolidated group. Thus, T files a separate return. T’s transfer outside the group triggers the ITC recapture and that “additional tax shall be added to the separate tax liability of T.” Treas. Reg. § 1.15.02-3(Ex. 4). The liability is not imposed on S, the transferor of the Section 38 property, or P, the other group member. Transferee liability is imposed on T. This reflects the policy embedded in § 47 and the ITC provisions that the responsible entity (now T) must continue to use Section 38 property its trade or business for the appropriate period.
Example five reflects precisely what happened in this case. A parent (LOF) transferred Section 38 assets to a subsidiary (LOF Glass) that was a member of the parent’s consolidated group. The parent then transferred its stock in the subsidiary to a third party outside the consolidated group (Pilkington).
D.
In Rev. Rui. 82-20, 1982-
The ruling initially noted that under Treas. Reg. § 1.47 — 3(f)(5)(ii) a recapture determination is required when the trans-feror of the Section 38 property does not retain a substantial interest in the subsidiary. This is in tension with § 1.1502-3(f)(2)(i), which does not treat the transfer from one member of a consolidated group to another as a § 47 disposition. To reconcile these provisions, the Commissioner assumed that the consolidated return regulation, § 1.1502 — 3(f)(2)(i), was “premised on the assumption that the property [would] remain[ ] within the consolidated group. When there is no intention at the time of the transfer to keep the property within the consolidated group, the transaction should be viewed as whole and not as separate transactions.” Rev. Rui. 82-20.
The rationale, according to the Commissioner, is that a parent corporation’s transfer of Section 38 property to its wholly-owned subsidiary is not treated as a disposition so long as the parent corporation substantially owns the subsidiary. I.R.C. § 47(b). When such a transfer is followed by a split-off of the subsidiary’s stock, however, recapture is imposed immediately because the transferor no longer retains a “substantial interest” in the transferee. If the government has correctly interpreted § 1.1502(f)(2)(i), then Taxpayer must recapture the ITCs. The majority offers no response to this argument.
E.
Rev. Rui. 82-20 is inconsistent with § 1.1502(f)(2)(i) because the treasury regu
First, if intent were the decisive factor under the regulation, the regulation would make that clear. Commissioner argues that the regulation does make that clear, because in crucial example five, the parent, subsidiary, and transferee file consolidated returns in 1967 and 1968, and the subsidiary transfers its Section 38 property in 1968, but the parent does not sell the transferee’s stock until 1969.' § 1.1502-3(f)(3) (Ex. 5). Commissioner concludes that the parent does not recapture the ITCs in this example only because the parent waited a year before selling the transferee’s stock.
This extraordinarily strained hypothesis is hard to accept primarily because the relevant regulations never mention intent. One cannot reasonably believe that the Treasury Department meant an intent test but, rather than saying so expressly, it said so through the circuitous route Commissioner defends. A parent company could certainly wait a year before transferring assets outside the consolidated group, yet have intended to make the transfer from the outset. Most likely, example five has the relevant events occurring in different years simply to make the hypothetical as simple and clear as possible with respect to the order in which the transactions take place. That certainly seems a more plausible explanation than to assume the reference to a different year somehow implies an intent standard. It also seems reasonable that the Treasury Department merely wanted example five to illustrate the clear language in § 1.1502 — 3(f)(2), which places obligations on the transferee without discussing the transferor’s intent.
Due to the single-taxpayer theory embodied in the consolidated return regulations and the resulting transferee liability imposed on LOF Glass for the ITC recapture, LOF’s transfer of the Section 38 property to LOF Glass did not trigger § 47; there was no disposition of Section 38 property, and thus no ITC recapture. See Treas. Reg. § 1.1502 — 3(f)(2)(i). Commissioner argues that even if this is the correct interpretation of § 1.1502 — 3(f)(2)(i), the initial transaction became relevant for § 47 purposes when LOF Glass left the LOF-affiliated group because the parent (LOF) no longer retained interest in the Section 38 property.
In April of 1986, LOF Glass split-off from the LOF affiliated group in the “D” reorganization with the exchange of LOF Glass shares for Pilkington’s interest in LOF. This occurred immediately after LOF made LOF Glass an independent subsidiary, but the parties stipulated that LOF Glass continued to use the Section 38 property in the glass business both before and after LOF Glass left the consolidated group. When LOF Glass left the group, it
Although Commissioner argues, in accordance with Rev. Rui. 82-20, that these intra-group transfers and the “D” reorganization evince an intent to avoid ITC recapture by disposing of the property outside of the group, the worst the transactions show is nothing more than a shift in ITC recapture liability.
IV.
Commissioner also argues that the interpretation of § 1.1502-3(f)(2)(i) contained in Rev. Rul. 82-20 is consistent with the “step-transaction doctrine.” Commissioner notes that the “incidence of taxation depends upon the substance of a transaction,” rather than its form. Comm’r v. Court Holding Co.,
The appeal of step-transaction analysis rapidly dissipates when one remembers that Commissioner stipulated that the transaction appropriately received “D” reorganization treatment, which means Commissioner stipulated, inter alia, that the split-off transaction was “not used principally as a device for the distribution of the earnings and profits” of LOF or LOF Glass. See I.R.C. § 355(a)(1)(B). The Commissioner thus conceded that LOF and LOF Glass were engaged in the “active conduct of a trade or business” for at least five years prior to the transaction and for five years after Pilkington became the owner of LOF Glass. See I.R.C. § 355(a) and (b). If the transfers from LOF Glass Division to LOF Glass and
The majority cites no authority for the proposition that the IRS can accept an entire transaction as justified by a legitimate business purpose to determine whether “D” reorganization treatment will apply, but not accept a part of that same transaction as motivated by a legitimate business purpose exclusively to determine ITC recapture — particularly given that the “substance over form” principle requires courts to view transactions “as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant.”
The majority further concedes, as it must, that this ease does not involve a situation where “ ‘[t]he whole undertaking ... was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else.’ Gregory v. Helvering,
Again, the Commissioner stipulated that the transaction properly received “D” reorganization treatment, which means Commissioner stipulated, inter alia, that the split-off transaction was “not used 'principally as a device for the distribution of the earnings and profits” of LOF or LOF Glass. See I.R.C. § 355(a)(1)(B) (emphasis added). The phrase “a device for the distribution of ... earnings and profits” means simply “a device for the distribution of ... earnings and profits [so as to avoid taxes].” Id. Put differently, the Commissioner conceded that the split-off was not principally a tax avoidance mechanism. The majority’s Tenth Circuit step-transac
Moreover, in Rev. Rul. 79-250, 1979-
V.
More than two decades ago, this Court correctly observed that the Treasury Department’s consolidated return regulations should receive greater deference than interpretations of those regulations. See Wolter Constr. v. Comm’r,
For all the aforementioned reasons, I respectfully dissent.
. The Supreme Court foreshadowed Mead in Christensen v. Harris County,
. It is hard to understate Mead’s importance. Justice Scalia described the decision as "one of the most significant opinions ever rendered by the Court dealing with the judicial review of administrative action.”
. However, the majority tries to minimize this. After writing that, "[i]n light of the Supreme Court’s decisions in Christensen and Mead, we conclude that Revenue Ruling 82-20 should not be accorded Chevron deference,” the majority notes that "revenue rulings do, however, constitute 'precedent[s] [to be used] in the disposition of other cases.' Rev. Proc. 89-14, 1989-
. The majority properly emphasizes that " '[uniformity among the circuits is especially important in tax cases to ensure equal and certain administration of the tax system.’ ” (quoting Nickell v. Comm’r,
. As the majority notes, the Salomon court depended heavily on its conclusion that
[i]n substance, if not in form, the direct and the circuitous transaction are the same. Each achieves a rapid transfer of section 38 property outside the group. To distinguish between them would deny economic reality. Moreover, such a holding would allow the common parent of a consolidated group ... to move section 38 property outside the group without paying recapture taxes simply by first transferring the property to a member subsidiary and then distributing the subsidiary’s stock to the third-party.
. This is different from the ITC provisions in the I.R.C. § 47(a)(1) and (2). In § 47, while a transfer between non-consolidated group members may constitute a "mere change in form that does not trigger recapture,” it is the transferor that the IRS holds liable for the recapture if the transferee disposes of the property or the transferor disposes of its interest in the transferee. The transferee has no liability at all. I.R.C. § 47(b).
. Commissioner argues that this result occurs because the regulations (and examples) assume that the consolidated group members initially intended for the property to remain within the group. This speculation ignores § 1.15 02-3 (f)(2), which imposes liability based on whether or not an intra-group transfer took place, not whether or not the parties intended the Section 38 assets to remain in the group after the transfer.- Notably, the regulations contemplate that T may leave the group and file its own return or a return with a new consolidated group. See Treas. Reg. § 1.1502-3(f)(2)(i).
. If T joins a new consolidated group, then T and the other members of the new consolidated group would then be liable. See Treas. Reg. § 1.1502 — 3(f)(2).
. As described above, this transfer occurred in exchange for the third party’s (Pilkington's) stock in the parent (LOF).
. This example stand in contrast to this case, in which the parent waited only a weekend to make the transfer.
. Treas. Reg. § 1.1502 — 3(f)(2)(i) states:
a transfer of Section 38 property from one member of the group to another member of such group during a consolidated return year shall not be treated as a disposition or cessation within the meaning of section 47(a)(1). If such Section 38 property is disposed of, or otherwise ceases to be Section 38 property or becomes public utility property with respect to the transferee, before the close of the estimated useful life which was taken into account in computing qualified investment, then section 47(a)(1) or (2) shall apply to the transferee with respect to such property (determined by taking into account the period of use, qualified investment, other dispositions, etc., of the transferor). Any increase in tax due to the application of section 47(a)(1) or (2) shall be added to the tax liability of such transferee (or the tax liability of a group, if the transferee joins in the filing of a consolidated return).
(emphasis added).
The majority claims that:
the more persuasive interpretation is that the decision to assign different events to different calendar years in Example 5 of CRR § 1.1502-3(f), rather than merely listing the order of events, has greater significance. See 2A Singer, Norman J., Sutherland Statutes and Statutory Construction, § 46.06 at 192 (2000 ed.) ("every word of a statute must be presumed to have been used for a purpose”).
The majority wants to infer an intent test because example five lists separate calendar years, instead of simply the order of events. This argument is silly. Had the Commissioner listed the order of events, rather than calendar years, it would not make an intent test
The Commissioner’s choice of language, however, tells us much more. If the Commissioner wanted an intent test, he could have used the word "intent” in his example. Sutherland also supports my interpretation. See, e.g., 2A Norman J. Singer, Sutherland Statutes and Statutory Construction § 46.06 at 135 (2000 ed.) ("What a legislature says in the text of a statute is considered the best evidence of the legislative intent or will.”); Singer, supra, § 47:23 at 304-06 (explaining that the doctrine of expressio unius est exclu-sio alterius indicates "an inference that all omissions should be understood as exclusions”).
. Commissioner’s position is also inconsistent with the notion that the entity with the ability to keep the Section 38 property in the appropriate trade or business use should be the same entity that faces recapture if it fails to do so. It may be more efficient to have the taxpaying party be the one that holds the assets rather than force the transferor to attempt to guarantee their future use ex ante by contract, since the property-holder (transferee) can more easily adapt to changes in its economic circumstances over the relevant life of the Section 38 material. Notably, this case is not about whether a tax gets paid, but who will pay it — the transferee or the transferor. Thus, siding with Taxpayer will not necessarily encourage tax avoidance.
. And it is not necessarily an intentional shift, since Commissioner stipulated that the reorganization was "not used principally as a device for the distribution of the earnings and profits of LOF or LOF Glass." (See J.A. at 57.) The Commissioner’s stipulation is discussed more thoroughly in conjunction with the step-transaction issue below.
. One sentence drafted by the majority deserves particular attention. The majority claims, without citation, that "[h]ere, although the individual steps of the transaction had a legitimate business reason, the transaction must be treated as a single unit and judged by its end result.” I have no idea how a party could possibly intend several steps to achieve various legitimate business purposes but simultaneously intend the series of steps to accomplish an illegitimate tax-avoidance objective. As a matter of logic, if an agent undertakes a series of related acts, and if each step is viewed as part of a process intended to achieve an legitimate goal, it is impossible to view all steps as intending to serve illegitimate ends. Somewhere along the line, the agent must have intended at least one of the steps to accomplish something improper (in this case, without a legitimate business purpose). Commissioner concedes Respondent acted with a business purpose at every stage.
. In fact, the Associated Grocers court “share[d] the government’s skepticism as to the alleged significance of taxpayer's claimed business purpose.”